Royal Bank of Scotland is set to cut the size of its stake in its Direct Line
insurance business to below 50pc as the lender moves to comply with a
European state-aid ruling.

Government-backed RBS said it could sell up to a 17pc stake in the insurer – or as many as 252m Direct Line shares – potentially reducing its holding in the business to just 48.5pc.

The sale comes ahead of a November deadline agreed with the European Commission at the time of RBS’s £45.5bn taxpayer bail-out. The agreement requires RBS to take its stake in Direct Line, which owns the Churchill and Privilege insurance businesses as well as the Green Flag breakdown service, to less than 50pc.

Based on yesterday’s closing share price of 210.2p, the shares sold could be worth as much as £530m.

The sale comes a day after Lloyds Banking Group sold a 20pc stake in its St James’s Place wealth management business for £520m. The deal was widely seen as an attempt by Britain’s largest retail bank to bolster its loss buffer ahead of a regulatory statement later this month on the capital positions of the country’s major banks.

However, a spokesman for RBS said that the Direct Line share sale was not connected to the Financial Services Authority’s assessment of the bank’s financial health. The spokesman added that the disposal would likely be capital neutral for the bank.

Lloyds’ sale of St James’s Place shares means that it will no longer consolidate the company’s financial performance with its own results. It is possible that RBS’s sale of the Direct Lines shares could also mean it no longer consolidates the insurer’s results.

RBS orginally floated Direct Line in October last year, selling a 30pc stake in the business for £787m. Under the terms of the EC agreement, RBS must sell all its shares in Direct Line by the end of next year.

The government has over the last year raised the pressure on RBS to scale back its operations to become a business more focused on the UK corporate and retail banking market.

Last month, RBS confirmed long-running questions over the future of its US Citizens banking unit, saying it would prepare for a stock market flotation of the business. RBS is also continuing to shrink its investment banking arm.

The pressure on the bank reflects growing pressure on the government to explain how and when it will reduce the state’s 82pc holding.

Sir Mervyn King, Governor of the Bank of England, said this month that he thought RBS should be broken up into a “good bank” and “bad bank”.

Giving evidence to the Commission on Banking Standards, Sir Mervyn, who will leave the Bank of England this summer, said the current “arms-length” handling of the state’s holdings was “a nonsense”.

“We shouldn’t worry about the consequential impact on the scale of public debt... Financial markets would see through this,” he said. “We should simply accept the reality today, and the reality is that [the shares] are probably worth less than we thought.”

RBS shares closed yesterday at 306.3p, valuing the bank at £34.2bn. However to reach the taxpayer’s breakeven price the shares will have to rise in value by about 200p.